Another Singapore Reit announces a rights issue

Starhill Global Real Estate Investment Trust yesterday announced plans to raise S$337.3 million ($232 million) from a renounceable one-for-one rights issue. The Reit, which invests in retail and office properties, said the money may be used to pare down its existing debt and to put it in a better position to capitalise on acquisition opportunities.

Rights issues have become a popular means for Singapore-listed companies to shore up their capital as the credit crunch has made bank financing either difficult to come by or prohibitively expensive. For the city-state's Reits, the sharp drop in unit prices since August 2007 has made the situation even worse as the sale of new units at a meaningful fund-raising size would in many cases have resulted in a significant dilution for existing unitholders.

In May last year K-Reit Asia raised $400 million from a rights issue and, earlier this year, CapitaMall Trust, which was the first Reit to list in Singapore, tapped its existing investors for $798 million. CapitaCommercial Trust (CCT) is also currently in the market with a $570 million one-for-one rights offer that is scheduled to close tomorrow. All three of these issuers have had strong support from their controlling shareholders, and in the case of the latter two -- both of which count Temasek as their largest investor -- this has given minority investors confidence to participate and ensured that the offerings were successful.

And Starhill is no exception in that respect. The Reit, which was listed in 2005 under the name of Prime Reit and for a period had Macquarie as its single-largest owner, is currently controlled by Malaysia's YTL Corp. The Malaysian investment holding and management company in October last year acquired a 26% stake in the trust, which was then known as Macquarie Prime Reit, and 50% of its management company, Prime Reit Management Holdings, from Macquarie for a total of $189 million, giving it effective control of the vehicle.

YTL has committed to take up its entitlement of 26.6% and will also sub-underwrite a large portion of the rights issue up to a maximum combined purchase of 75%. It may also subscribe to excess rights units or buy additional nil-paid rights in the market, according to a statement, suggesting that YTL could end up with more than three-quarters of the issue. The remaining 25% will, however, be underwritten by Credit Suisse, DBS and Merrill Lynch, which are also joint lead managers for the offering.

The rights offer will comprise 963.7 million new units that will be issued at a price of S$0.35 apiece. The price translates into a 45.3% discount to Friday's closing price of S$0.64 (the trust was suspended from trading yesterday as details of the offering was revealed) and a 29.3% discount to the theoretical ex-rights price (Terp) of S$0.495 per unit.

The discount versus Terp is tight versus the rights offerings earlier this year and also in light of the fact that the company's issued share capital will double as a result of the issue. However, CCT's rights offering which is also a one-for-one deal, is priced at a 28.5% discount to Terp. Indeed, the tighter discount versus the deals announced in the first quarter appears to reflect the improved market sentiment over the past couple of months. While still well below the levels where it traded 12 months ago, Starhill has rebounded 66% since it hit a 2009 low of S$0.385 on March 10 -- and that's despite having fallen in 10 of the past 11 sessions. The correction has left it 15% below its early June high and about 36% down from last summer's trading levels just above S$1.00.

Investors who decide to participate in the offering -- the deal is open to all investors who hold Starhill units on the July 21 book closure date -- will have the right to any dividend payment for the third quarter (July-September), even though the deal doesn't close until August 7. Based on the dividends paid for 2008, the new units are being issued at an 11% yield, which represents an attractive yield spread of more than 800bp over Singapore's 10-year government bond.  

Those who don't want to add to their holdings can choose to sell the nil-paid rights in the market between July 24 and August 3. The offering is subject to approval by independent unitholders of a whitewash waiver that will release YTL of the obligation to make a general offer for the remaining shares should it cross the 30% trigger threshold as a result of sub-underwriting the deal. Unitholders will get to vote at an extraordinary general meeting on July 13.

In a written statement, YTL Pacific Star Reit Management's executive chairman, Tan Sri Dato Francis Yeoh, said that the sub-underwriting reflects YTL's long-term commitment to grow Starhill Global Reit into a global real estate investment platform. He also noted that the rights issue is part of a "long-term pro-active, structured and prudent capital management strategy" with regard to the Reit.

In yesterday's announcement, Starhill indicated that it may repay S$236 million of its outstanding borrowings of S$670.1 million, which would lower its gearing to 20.7% from 33.4%. However, it stressed that the actual repayment could be either more or less than that.

"The rights issue will reduce refinancing concerns in a tight credit environment and enhance Starhill Global Reit's financial flexibility to carry out asset enhancement and seize attractive acquisition opportunities near the trough of the property cycle," he said.

How close that trough really is appears to be up for debate, however. In connection with the release of its first quarter earnings, Starhill noted that the economic outlook for Singapore and Japan, where most of its properties are located, remains weak for the rest of 2009. And this is expected to put downward pressure on occupancy and rental rates of both office and retail properties. However, the trust said its retail assets in Singapore, which contribute a significant portion of the group's revenues, have "mitigating characteristics" such as the long-term master lease for the bulk of the retail space in its Ngee Ann City property, and a staggered lease term expiry profile.

In yesterday's statement, the Reit noted that overall rentals for shop space in Singapore fell 3.3% in the first quarter compared with a 0.6% decrease in the fourth quarter 2008. However, the decline in selling prices slowed somewhat to 4.2% in the first quarter from 4.8% in the previous three months. Meanwhile, rentals for Singapore office space fell 10.7% in the first quarter, versus a 6.5% decline in the fourth quarter last year, and selling prices dropped by 12% versus a 4.9% decline in the previous three months. In another worrying sign for office property owners, office vacancy rates increase to 10% in the first quarter from 8.8% at the end last year, while 862,000 square metres of new office space is expected to be completed between now and 2011.

At the time of its listing, Starhill Global Reit had a portfolio comprising two major properties on Singapore's Orchard Road -- Wisma Atria and Ngee Ann City. In 2007 it added seven properties in Tokyo and one in Chengdu in China. The 10 properties currently in its portfolio are valued at about S$2 billion.